2.4 National Income Flashcards
(15 cards)
What is the circular flow of income?
A model that shows how money flows between households and firms in an economy through income, expenditure, and output.
What are the three main flows in the circular flow model?
Income (wages, rent, interest, profit)
Expenditure (consumer spending)
Output (production of goods and services)
What are injections in the circular flow of income?
Additions to the economy:
Investment (I)
Government spending (G)
Exports (X)
What are withdrawals (leakages) in the circular flow?
Money leaving the economy:
Saving (S)
Taxes (T)
Imports (M)
What happens when injections > withdrawals?
The economy grows — national income increases.
What happens when withdrawals > injections?
National income falls — the economy contracts.
What is macroeconomic equilibrium?
When aggregate demand equals aggregate supply — planned injections = planned withdrawals.
What causes disequilibrium in the circular flow?
Changes in any component of AD or AS (e.g. sudden rise in investment, fall in exports, or a tax increase).
What is the multiplier effect?
When an initial injection into the economy leads to a greater final increase in national income.
What is the multiplier formula?
Multiplier = 1 / MPW
MPW = Marginal Propensity to Withdraw = MPS + MPT + MPM
What is the marginal propensity to consume (MPC)?
The proportion of extra income that households spend on consumption
What is the marginal propensity to save (MPS)?
The proportion of extra income that is saved.
What is the marginal propensity to tax (MPT)?
The proportion of extra income paid in taxes.
What is the marginal propensity to import (MPM)?
The proportion of extra income spent on imports.
What factors affect the size of the multiplier?
Size of leakages (savings, tax, imports)
Level of spare capacity
Consumer confidence
Time lags
